Where the Buffalo Roam and Tax Collectors Play (a.k.a A CFO’s Sales Tax Nightmare)

Michael Shumate
5196
04/01/2010

MNP-Body

Imagine the following fact pattern:

A small startup software company - keen to monetize the company’s unique software offering - goes South to generate sales. The company’s software can be delivered electronically, shipped in a box, or accessed through a web site. The initial sales are promising, and the company quickly accumulates a significant volume of US sales.

Being in a startup mode, the young enterprising CFO decides to play loosely with the mind numbing amount of US State sales tax rules and does not charge any US state sales tax on the company’s sales. The CFO’s decision almost inevitably reduces outside consulting fees (ie: accountants and attorneys), at least in the short term.

Unfortunately for the company, the recession hits and an otherwise viable enterprise slips into bankruptcy and is ultimately liquidated.

Many a CFO would make the above decision; especially in a moment in time. However, many Canadian based CFOs make such a decision without a complete understanding of the effects that decision can be to the company or for the individual making the decision.

To be fair, the decision as to when to charge sales tax in the United States is a difficult decision, especially in the software industry. The myriad of state rules is dependent on many factors.

Some states tax the electronic delivery of software while others exempt electronic delivered goods. Certain states tax software access through the web, others exempt such use of software. For the software industry, a state by state analysis needs to occur on a product by product level to know when or when not to charge sales tax. Complexity frequently creates a desire to ignore.

However, what the CFO should consider is not only is he making a decision for his company, he is also making a decision that can affect his personal finances.

Pursuant to most state statutes, the Department of Revenue of a state has the option to pursue collection of unpaid sales tax against any party who has any part in the accounting, collection and remittance of the sales tax. Most states expressly state that “officers” will be liable.

A typically statue reads as follows:

The officers of a corporation that are personally liable for sales tax include any president, vice-president, secretary or treasurer and any other officers... and any other person who performs duties or responsibilities in the management of the corporation.

Typically a state does not begin with a direct assessment against an officer. Traditionally, a state will pursue the company for any unpaid sales tax liability. However, the state does have the right to collect directly from an officer. States typically follow the easiest path to the money. If the company is no longer viable or the officer is easier to reach, the state may go directly for the officer’s wallet.

To make matters worse, in some states the officer liability is not dischargeable in bankruptcy and at times can qualify as a criminal rather than a civil violation.

Although sales tax nightmares are infrequent, they do occur. The CFO in the above fact pattern has exposed himself to such a nightmare, whether or not he would come to experience it, may be a matter of luck (or rather bad luck).

A more appropriate path may be to understand your company’s obligation regarding sales tax and ensure such obligations are satisfied with your company’s cash rather than your own.

The Buffalo may all be gone in the Land of the Buffalo, but unfortunately they may have been replaced by tax collectors. Just takes steps today to avoid a visit tomorrow.